Development of Compensation System

Compensation system involves the total rewards that are given to the employees for the labour and services they provide to the organization. Compensation includes direct monetary benefits as well as indirect monetary benefits.

Wages and salaries form the direct financial benefits that an employee receives from his or her company. Besides, wages and salaries, bonuses and commissions also form a part of the direct monetary benefits. The indirect monetary benefits include paid absences and other leave benefits, retirement plans, employee insurance schemes, health plans, education benefits and other such benefits.

A well-defined and balanced compensation system gives the organization an advantage of maintaining internal as well as external equity. It is a powerful tool for attracting employees, motivating them to work in achieving the strategic organizational goals, and retaining them in the long run. An HR Consulting Firm can provide an in depth analysis and detailed report on the setting up of a balanced compensation system for the company.

An organization need to have a clear compensation philosophy which is in line with the strategic goals, objectives and culture of the organization. Based on the compensation philosophy of the company, the various components of compensation are designed and chalked down in detail.

The development of compensation philosophy includes the study of various aspects viz:

  • Impact of compensation strategy in promoting organizational success

  • Organization’s stand in considering the compensation provided as a tool in attracting and/or retaining employees

  • Does the organization intend to lead/lag/match the compensation market for the given geographic area and in the concerned industrial sector?

  • How does the organization aims at maintaining internal and/or external equity?

  • How is the employee’s performance linked in relation to wage or salary increases?

  • Following the legal formalities, rules and regulations of the land

Compensation detailing comprises of identifying positions and setting up of wage or salary specifications against each of the position. Also, incentive packages and bonuses, if any, are clearly defined for each of the position while describing the compensation related details.

Compensation detailing may involve execution of following activities depending upon the requirements of the organization:

  • Designing pay scale

  • Defining bonus and incentive plans

  • Performing salary surveys

  • Examining the requirement for wage/salary changes or increase

  • Defining guidelines for change/increase in wage/salary

  • Elaborate preparation of compensation policy and compensation strategy

A compensation study carried out in an organization generally involves following important elements:

  • Analyzing the current situation and requirements of the organization

  • Conducting salary/wage surveys and interviews within the organization

  • Studying the various positions or jobs as existing in the organization

  • Restructuring and redefining the positions, according to needs

  • Defining the internal worth of the different positions in the organization

  • Ranking the various positions and jobs in the company

  • Evaluating the existing base compensation plan of the organization

  • Identifying and evaluating the market pay structures

  • Revising the base compensation plan in the organization

  • Matching the changed compensation package with the current fiscal resources of the organization

  • Comprehending the impact of pay revisions

  • Laying down the guidelines for revised pay administration

  • Preparing an elaborate report on the compensation studies to be submitted to the top management

Depending upon the requirements of the company, the HR Consulting Firm may take up the necessary aspects required to be considered for development and/or improvement of the compensation system in the organization, thereby, strengthening the compensation system of the company by making it more equitable and attractive.


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